4 Things to Consider About Passive Target-Date Funds

Key findings from Morningstar’s Target-Date Fund Landscape report

Jeff Holt, Morningstar Research Services LLC

Assets in target-date mutual funds surpassed $1 trillion in 2017,
but even more stunning for the year was investors’ flight to
target-date series that own mostly passively managed index funds.

Of the record-high $70 billion that flowed into target-date funds
in 2017, 95% went to passive target-date funds as there appears a
healthy appetite for lower-cost offerings. And to meet the lower-cost
demand, many target-date providers have become more inclined to launch
additional, lower-cost series that have generally been more popular
than their legacy offerings.

In our latest report, we highlighted noteworthy
considerations for those choosing between active and passive
target-date funds. Here are four of them:

The distinction between active and passive target-date
series has become murkier. While fees for target-date
funds continued their multiyear decline in 2017, the injection of
more passive exposure within historically active target-date series
and the launch of series that blend active and passive funds has
contributed to that trend. The mix of active and passive underlying
funds should be considered when determining the attractiveness of a
target-date series' fees.

There’s no such thing as a truly passive portfolio for
target-date funds. Looking at sub-asset-class glide
paths, passive target-date series were actually more different from
one another than active ones; and they were most different in funds
near their target retirement date, when investor balances can be
expected to be near their peak. This reinforces the notion that no
target-date series is truly passively managed, as every target-date
manager makes active decisions in designing a glide path and
selecting asset classes.

Target-date managers appear to have less conviction in their
passive series. When target-date managers run multiple
series, they almost always personally invest more frequently—and in
higher amounts—in their older, pricier series than the newer,
cheaper one. Not a single target-date manager has more than $1
million invested in a passive target-date series, whereas 13
target-date managers have at least that much in an active series.

Investors haven’t consistently been better off by moving to
the lower-cost offering. While multiple target-date
providers have launched lower-cost series to meet investor demand,
those series' performance results have lagged the older, more-costly
ones in several instances.

Target-date funds continue to play an increasing role in helping
investors reach their retirement goals by serving as a common default
investment in defined-contribution retirement plans. This year's
report also covers other developments in the competitive landscape and
highlights noteworthy considerations for target-date investors in five
areas: Price, Performance, Parent, People, and Process.

Please see below for important disclosure.

Download the full version of Morningstar’s 2018
Target-Date Fund Landscape report.

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